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PFC (250)
Banks/Financial Institutions
Disappointing results, margin pressure visible; retain REDUCE. PFC reported PAT
of Rs6.1 bn, up 1% yoy and 20% below estimates. Lower-than-expected NII on the
back of significant (0.6% qoq) decline in spreads was the key reason. Rising rates in the
system and large liability re-pricing that was not passed on to loan assets have likely
affected PFC’s performance. Loan growth moderated to 25% from 27% in December
2010. We revise estimates to factor lower loan growth and margin; retain REDUCE with
price target of Rs250.
PFC misses NIM estimates
PFC reported NII of Rs8.2 bn, up 9% yoy. While loan growth was moderate at 25%, the sharp
decline in margin was the key disappointment.
PFC’s 4QFY11 NIM (as per KS estimates) of 3.5% is down from 4.1% over last three quarters
on the back of 2.1% spreads (2.7% in last three quarters). PFC’s borrowings cost increased by
0.4% qoq likely on the back of rising rates in the system and large liability re-pricing (Rs200 bn
of loan liabilities were due for re-pricing in 4QFY11).Complete details on its borrowings for the
quarter are not yet available.
A decline in asset yields of 20 bps qoq was another disappointment. Notably, PFC raised
lending rates in September 2010 yet asset yields have compressed by 40 bps over last two
quarters; we await management commentary on the same.
PFC raised forex loans equivalent to US$260 mn in February 2011. Foreign currency liabilities
are about 5% of its overall borrowings; about 10% of these loans are hedged for forex
currency. Volatility on the forex account remains a risk to our earnings.
We are reducing our estimates for spreads to 2.4% from 2.6% for FY2012E. Our NIM estimates
decline to 3.8% from 3.9% for FY2012E. Lower growth estimates (thereby resulting in
marginally lower leverage) pushes up the margin estimate for FY2013E by 15 bps to 3.8%.
Loan growth moderates
We are reducing our loan growth estimates to 23% from 27% for FY2012E. PFC reported loan
growth of 25% in 4QFY11. Notably, PFC has reported 24% loan growth in FY2009 and FY2010.
The growth rate had accelerated to 29%, 28% and 27% in 1Q, 2Q and 3QFY11, respectively.
PFC has not yet released the detailed presentation which highlights the trends in incremental
business. Notably, as of December 2010, PFC had outstanding (undisbursed) approvals of
Rs1.6 tn of which it has already executed documents for proposals of Rs1.05 tn (i.e.1.2X
current loan book).
PFC files DRHP for FPO
PFC proposes to raise 172 mn shares (15% of current equity base) in the proposed public
equity offering. GoI will also divest 5% stake in PFC in the FPO. PFC’s tier-I capital adequacy
was 17% as of December 2010. Its has been recently been classified as an ‘infrastructure
NBFC’ and needs to maintain overall capital adequacy of 15%. We have not factored the
FPO in our estimates.
Retain REDUCE with price target of Rs250
We retain REDUCE rating on PFC with a price target of Rs250 (Rs275 earlier).
We believe that high losses at state utilities (and lack of adequate information on the
current status of their financial health) will have an overhang on the stock price
performance of PFC.
We agree with policy makers that a default on loans to PFC (and REC) may be a low
probability event due to their nodal agency role, payment security mechanisms and the
current R- APDRP scheme. (Please find key highlights of our meetings with Ministry of
Power and CERC at the end of this note.) However, we find risks to medium-term loan
growth estimates for financers of state electricity boards in case of a severe deterioration
in the financials of state utilities. Valuations have moderated over the past few months
but we still find better potential in public banks, which are available at lower valuations
and offer a better risk-return profile in the current environment.
It would be imperative to get clarity on the likely reason for sharp decline in NIM during
the quarter – a weaker-than-expected margin trend can also put pressure on stock.
Key highlights of our note on meeting with MoP and CERC
Absence of tariff revision leading to large losses at state utilities and lack of availability of
coal are the key challenges for the Indian power sector. We highlight key takeaways from
our interactions with CERC and Ministry of Power, earlier this month, on the current
challenges in the power sector.
The absence of tariff revisions for 4-5 years is amongst the key reasons for the
deteriorating financial health of state distribution companies (this is more specifically
observed in case of UP, Rajasthan and Tamil Nadu). The policy-makers were however
optimistic that the current situation will improve – for instance, Rajasthan has recently
effected a tariff increase of ~30%.
Schemes such as APDRP and a National Electricity Fund, which offer grants/subsidies for
improving the viability of the distribution segment against proven reduction in losses, can
deliver promising results, according to policy makers. As such, financier may not face
defaults on their loans to state utilities.
Lack of availability of coal remains a larger issue for the sector due to Coal India’s inability
to match the improved execution rate by the power sector. The problem is compounded
by a lack of logistics infrastructure—both railways and ports that limit the transport of
imported as well as domestically produced coal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PFC (250)
Banks/Financial Institutions
Disappointing results, margin pressure visible; retain REDUCE. PFC reported PAT
of Rs6.1 bn, up 1% yoy and 20% below estimates. Lower-than-expected NII on the
back of significant (0.6% qoq) decline in spreads was the key reason. Rising rates in the
system and large liability re-pricing that was not passed on to loan assets have likely
affected PFC’s performance. Loan growth moderated to 25% from 27% in December
2010. We revise estimates to factor lower loan growth and margin; retain REDUCE with
price target of Rs250.
PFC misses NIM estimates
PFC reported NII of Rs8.2 bn, up 9% yoy. While loan growth was moderate at 25%, the sharp
decline in margin was the key disappointment.
PFC’s 4QFY11 NIM (as per KS estimates) of 3.5% is down from 4.1% over last three quarters
on the back of 2.1% spreads (2.7% in last three quarters). PFC’s borrowings cost increased by
0.4% qoq likely on the back of rising rates in the system and large liability re-pricing (Rs200 bn
of loan liabilities were due for re-pricing in 4QFY11).Complete details on its borrowings for the
quarter are not yet available.
A decline in asset yields of 20 bps qoq was another disappointment. Notably, PFC raised
lending rates in September 2010 yet asset yields have compressed by 40 bps over last two
quarters; we await management commentary on the same.
PFC raised forex loans equivalent to US$260 mn in February 2011. Foreign currency liabilities
are about 5% of its overall borrowings; about 10% of these loans are hedged for forex
currency. Volatility on the forex account remains a risk to our earnings.
We are reducing our estimates for spreads to 2.4% from 2.6% for FY2012E. Our NIM estimates
decline to 3.8% from 3.9% for FY2012E. Lower growth estimates (thereby resulting in
marginally lower leverage) pushes up the margin estimate for FY2013E by 15 bps to 3.8%.
Loan growth moderates
We are reducing our loan growth estimates to 23% from 27% for FY2012E. PFC reported loan
growth of 25% in 4QFY11. Notably, PFC has reported 24% loan growth in FY2009 and FY2010.
The growth rate had accelerated to 29%, 28% and 27% in 1Q, 2Q and 3QFY11, respectively.
PFC has not yet released the detailed presentation which highlights the trends in incremental
business. Notably, as of December 2010, PFC had outstanding (undisbursed) approvals of
Rs1.6 tn of which it has already executed documents for proposals of Rs1.05 tn (i.e.1.2X
current loan book).
PFC files DRHP for FPO
PFC proposes to raise 172 mn shares (15% of current equity base) in the proposed public
equity offering. GoI will also divest 5% stake in PFC in the FPO. PFC’s tier-I capital adequacy
was 17% as of December 2010. Its has been recently been classified as an ‘infrastructure
NBFC’ and needs to maintain overall capital adequacy of 15%. We have not factored the
FPO in our estimates.
Retain REDUCE with price target of Rs250
We retain REDUCE rating on PFC with a price target of Rs250 (Rs275 earlier).
We believe that high losses at state utilities (and lack of adequate information on the
current status of their financial health) will have an overhang on the stock price
performance of PFC.
We agree with policy makers that a default on loans to PFC (and REC) may be a low
probability event due to their nodal agency role, payment security mechanisms and the
current R- APDRP scheme. (Please find key highlights of our meetings with Ministry of
Power and CERC at the end of this note.) However, we find risks to medium-term loan
growth estimates for financers of state electricity boards in case of a severe deterioration
in the financials of state utilities. Valuations have moderated over the past few months
but we still find better potential in public banks, which are available at lower valuations
and offer a better risk-return profile in the current environment.
It would be imperative to get clarity on the likely reason for sharp decline in NIM during
the quarter – a weaker-than-expected margin trend can also put pressure on stock.
Key highlights of our note on meeting with MoP and CERC
Absence of tariff revision leading to large losses at state utilities and lack of availability of
coal are the key challenges for the Indian power sector. We highlight key takeaways from
our interactions with CERC and Ministry of Power, earlier this month, on the current
challenges in the power sector.
The absence of tariff revisions for 4-5 years is amongst the key reasons for the
deteriorating financial health of state distribution companies (this is more specifically
observed in case of UP, Rajasthan and Tamil Nadu). The policy-makers were however
optimistic that the current situation will improve – for instance, Rajasthan has recently
effected a tariff increase of ~30%.
Schemes such as APDRP and a National Electricity Fund, which offer grants/subsidies for
improving the viability of the distribution segment against proven reduction in losses, can
deliver promising results, according to policy makers. As such, financier may not face
defaults on their loans to state utilities.
Lack of availability of coal remains a larger issue for the sector due to Coal India’s inability
to match the improved execution rate by the power sector. The problem is compounded
by a lack of logistics infrastructure—both railways and ports that limit the transport of
imported as well as domestically produced coal.
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